December 1 - Bloomberg (Lukanyo Mnyanda and Paul Dobson): "Bailouts for Ireland
and Greece and speculation that Portugal and Spain may need aid are prompting
investors to shun some of Europe's highest-rated bonds. The cost of insuring
German debt against default rose yesterday to the highest since May. The yield
on 10-year French securities climbed to as much as 3.247 percent, the most
in more than in six months, and the extra yield, or spread, investors demand
to hold 10-year Belgian bonds instead of similar-maturity German bunds climbed
to the most since at least 1993."

December 1 - Bloomberg (Shannon D. Harrington): "The failure of European leaders
to contain the region's debt crisis with a bailout of Ireland has driven relative
borrowing costs in the global corporate bond market to a 12-week high. Investors
demand an extra 1.77 percentage points in yield to own company bonds instead
of government debt, the most since Sept. 8..."

November 30 - Bloomberg (Charles Penty and Gavin Finch): "Spain's banks may
struggle to refinance about 85 billion euros ($111 billion) in debt next year
as costs surge on concern continental Europe's fourth- biggest economy may
need an Irish-style bailout."

November 30 - Bloomberg (Tim Catts): "Corporate bond sales worldwide are tumbling
on concern Ireland's debt crisis will spread across Europe as returns on the
notes approach their worst month since credit markets froze two years ago.
Issuance has slumped 29% since Nov. 15, compared with the same period a year
earlier, after surging 34% in the first half of the month..."

November 30 - Bloomberg (Andres R. Martinez): "Mexico's benchmark peso bonds
are headed to their biggest monthly slide since February 2009, as investors
shun riskier assets on concern the Irish debt crisis may spread to other European
nations."

December 1 - Bloomberg (Ron Harui): "Foreign-exchange losses from carry trades
climbed to the highest level in more than two years as hedge funds and other
large speculators unwound bets that the euro will strengthen amid Europe's
sovereign-debt crisis. Royal Bank of Scotland Plc's index for carry trades...
fell 9.7% in November, the biggest drop since October 2008."

November 30 - Bloomberg (Krystof Chamonikolas): "Hungary's bonds tumbled for
a seventh day, lifting five-year yields to the highest since September 2009,
as a row between the central bank and the government over interest rates undermined
investor confidence. The yield on government bonds in forint due February 2015
jumped 20 basis points to 8.38%..."

Global Government Finance Bubble Watch:

December 3 - Bloomberg (Simon Kennedy and Simone Meier): "Jean-Claude Trichet
is keeping the onus on governments to fix the debt crisis as the European Central
Bank buys bonds to win politicians time to cut deficits. Warning European Union
leaders that they can't rely on 'benign neglect' to quell market turmoil,
Trichet, the ECB's president, is deploying a two-pronged strategy to ease roiled
markets. The bank snapped up Portuguese and Irish bonds again today after Trichet
yesterday assured investors that policy makers will delay the withdrawal of
emergency liquidity."

December 3 - Bloomberg (Alexandra Harris and Brendan A. McGrail): "U.S. states
and cities scheduled sales of $22.6 billion in debt this week, almost the highest
level in five years..."

Currency Watch:

November 30 - Bloomberg (Anchalee Worrachate): "The value of currency derivatives
worldwide doubled in the past three years to $3.2 trillion amid the 'turbulence'
of the credit crisis... The gross market value, or the cost to replace all
open contracts such as swaps, options and forwards, jumped from $1.6 trillion
in June 2007, according to... the BIS."

The dollar index reversed course, declining 1.5% for the week (up 1.6% y-t-d)
to 79.144. On the upside for the week, the South African rand increased 4.4%,
the Norwegian krone 3.4%, the Swedish krona 3.0%, the Swiss franc 3.0%, the
Australian dollar 3.0%, the Brazilian 2.4%, the New Zealand dollar 2.2%, the
South Korean won 1.9%, the Japanese yen 1.8%, the Canadian dollar 1.8%, the
Danish krone 1.4%, the Euro 1.3%, the Singapore dollar 1.3%, the Mexican peso
1.2%, the British pound 1.2%, and the Taiwanese dollar 0.5%.

Commodities Watch:

December 2 - Bloomberg: "China's gold imports jumped almost fivefold in the
first 10 months from the entire amount shipped in last year as concern about
rising inflation increased its appeal as a store of value, said the Shanghai
Gold Exchange. Imports gained to 209 metric tons compared with 45 tons for
all of 2009..."

November 29 - Bloomberg (Whitney McFerron, Elizabeth Campbell and Jeff Wilson): "This
year's agriculture boom is a bust for U.S. dairy farmers as surging costs for
cattle feed compound a glut of milk products. While the 27% jump in wheat prices
and 48% gain in cotton may send farm income to a record, dairies will lose
money in 2011 for the second time in three years, said Mike Brown, an economist
at Glanbia Foods... Corn, a feed ingredient, jumped 33% in the two months ended
Oct. 31...Dairy farmers expanded herds following the 70 percent jump in prices
to a record in 2007..."

December 3 - Bloomberg (Yi Tian): "Copper prices rose, capping the biggest
weekly gain in more than four months..."

December 3 - Bloomberg (Whitney McFerron): "Wheat rose to the highest price
in almost four months on renewed concern that unusually heavy rainfall in Australia
will delay the harvest and reduce grain quality."

December 3 - Bloomberg (Leslie Patton): "Cotton prices surged, capping the
biggest weekly gain in 39 years, on mounting concern that exports will be limited
from India, the world's second-largest grower... Futures in New York have soared
75% this year as demand in China climbed and inventories plunged in the U.S..."

December 3 - Bloomberg (Whitney McFerron): "Rice futures rose, heading for
the biggest weekly gain since 2009, on concern that global demand will outpace
supplies as adverse weather cuts output from Asia to the U.S."

November 29 - Bloomberg (Yuriy Humber): "Uranium rose to the highest in more
than two years after China Guangdong Nuclear Power Co. agreed on long-term
supply with the two largest producers and expectations Asia's biggest economy
will boost its reactor-building targets."

December 1 - Bloomberg: "China's manufacturing grew at a faster pace for a
fourth straight month in November, indicating the economy can withstand higher
interest rates as price pressures escalate. The Purchasing Managers' Index
rose to 55.2 from 54.7 in October..."

December 1 - Bloomberg: "China's home prices rose 0.8% in November, gaining
for a second month even as the central bank raised interest rate for the first
time since 2007, said SouFun Holdings Ltd., the nation's biggest real estate
website owner."

December 1 - Bloomberg: "China's interest-rate swaps jumped the most in three
years last month on speculation the central bank will raise borrowing costs
further to rein in the fastest inflation since 2008 as foreign capital surges
into the nation."

November 30 - Bloomberg (Eunkyung Seo): "Rolls-Royce Motor Cars Ltd., Bayerische
Motoren Werke AG's ultra-luxury nameplate, plans to sell 800 cars in China
in 2011 as it aims to raise sales eightfold in two years in the world's largest
auto market. The automaker delivered almost 500 cars in China in the first
10 months of 2010, compared with about 100 for the whole of last year..."

India Watch:

November 30 - Bloomberg (Kartik Goyal): "India's economy grew more than economists
estimated last quarter, adding to evidence of a strengthening in domestic demand
that's stoked inflation... Gross domestic product rose 8.9% in the three months
through September from a year earlier..."

November 29 - Bloomberg (Novrida Manurung): "Indonesia's economy may accelerate
at least 6% in the fourth quarter and 6% for the full year 2010, Coordinating
Minister for the Economy Hatta Rajasa said..."

December 1 - Bloomberg (Suttinee Yuvejwattana): "Thailand unexpectedly raised
interest rates for the third time this year, signaling policy makers view inflation
as a bigger threat than slowing growth."

Latin America Watch:

November 29 - Bloomberg (Andre Soliani and Iuri Dantas): "Brazil's broadest
measure of inflation quickened to the fastest pace in 28 months on a surge
in raw materials and agricultural goods. Consumer, construction and wholesale
prices, as measured by the IGP-M price index, jumped 1.45% in November... Prices
rose 10.27% from a year ago."

December 1 - Bloomberg (Drew Benson and Camila Russo): "Argentine inflation
of almost 30% will drive local governments to borrow 18.4 billion pesos ($4.6
billion) next year to pay for rising wages and budget deficits."

Unbalanced Global Economy Watch:

December 1 - Bloomberg (Jennifer Ryan): "U.K. manufacturing growth unexpectedly
accelerated to the fastest pace in 16 years in November as export orders climbed."

December 1 - Bloomberg (Simone Meier): "Europe's manufacturing industries
expanded at the fastest pace in four months in November, led by Germany...
A gauge of manufacturing in the 16-nation euro area rose to 55.3 from 54.6
in the previous month..."

November 29 - Bloomberg (Simone Meier): "European confidence in the economic
outlook improved to the highest in three years in November as Germany's export-driven
growth helped counter concerns that a spreading sovereign-debt crisis will
hurt the recovery."

November 30 - Bloomberg (Rainer Buergin): "German unemployment fell for a
17th month in November as business optimism improved, underscoring the gulf
between Europe's biggest economy and peripheral nations struggling to cut debt.
The number of people out of work declined a seasonally adjusted 9,000 to 3.14
million, the lowest since December 1992..."

November 29 - Bloomberg (Toby Alder and Niklas Magnusson): "Sweden's economic
growth gained momentum in the third quarter as exports and private spending
supported a rebound in the largest Nordic economy. Gross domestic product expanded
2.1% in the three months through September..."

U.S. Bubble Economy Watch:

December 3 - Bloomberg (Timothy R. Homan): "Employers added fewer jobs than
forecast in November and the unemployment rate rose to 9.8%, pointing to economic
weakness that's likely to keep the Federal Reserve pumping money into the financial
system. Payrolls increased 39,000, less than the most pessimistic projection
of economists surveyed by Bloomberg... The unexpected gain in unemployment
is likely to intensify political debate over extending Bush-era tax cuts, as
well as the Fed's $600 billion program of asset purchases intended to spur
growth."

Real Estate Bubble Watch:

December 2 - Bloomberg (John Gittelsohn): "U.S. homes in the foreclosure process
sold for about 32% less than non-distressed properties in the third quarter,
the biggest discount in five years, as buyer demand slumped, according to RealtyTrac
Inc... A quarter of all U.S. transactions involved those types of homes, according
to the Irvine, California-based data seller."

Bernanke defended the Fed's decision to purchase $600 billion in Treasury
securities and didn't rule out expanding the program, in an interview for CBS
television's '60 Minutes,' the network said. 'He explains why the
Fed announced its intention to buy $600 billion in Treasury securities, defending
against charges the move will lead to inflation and not ruling out the purchase
of more,' according...CBS."

November 29 - Bloomberg (Michael Heath and Robert Fenner): "Reserve Bank of
Australia Governor Glenn Stevens said the nation's mining industry may propel
the economy over the long term with less volatility, fueled by 'unprecedented'
demand for steel in China and India. 'There is likely to be a further
significant rise in business investment over the next few years, from a level
that is already reasonably high as a share of gross domestic product,' Stevens
said..."

Fiscal Watch:

December 3 - Wall Street Journal (Corey Boles): "The president's U.S. deficit
commission received the backing of a majority of its 18-strong panel, but fell
short of the 14 votes needed to possibly trigger congressional votes on its
recommendations."

November 26 - Bloomberg (Brian Faler): "Senate Republicans have endorsed a
call for a constitutional amendment requiring the government to balance its
budget after Tea Party candidates made erasing the deficit a rallying cry throughout
the U.S. election campaign. While the calls may be urgent, even Washington's
leading deficit foes say it will take decades to balance the books. A proposal
by the heads of President Barack Obama's debt commission to cut the budget
by $4 trillion wouldn't wipe out the deficit for more than 25 years. Representative
Paul Ryan, who's in line to become chairman of the House Budget Committee,
predicts it will take a half-century... 'This budget is screwed up so
badly you can't balance it in the immediate future,' said Ryan... Senator Dick
Durbin of Illinois, the Senate's No. 2 Democrat, said the problem is 'pure
demographics. Boomers are showing up old and sick and, as a consequence, costs
are dramatic.'"

GSE Watch:

November 30 - Bloomberg (Lorraine Woellert and Clea Benson): "Fannie Mae and
Freddie Mac are facing growing resistance as they attempt to push failed home
loans off their books and onto the balance sheets of banks including Bank of
America Corp. and JPMorgan Chase & Co. The two government-owned mortgage
companies are enforcing contracts that require lenders to buy back loans that
didn't meet underwriting standards. At the end of September, the companies
reported, banks hadn't responded to $13 billion in buyback requests."

Muni Watch:

December 3 - Bloomberg (Alexandra Harris): "Investors withdrew $469 million
from municipal-bond mutual funds in the week ended Dec. 1, the third straight
outflow, according to Lipper FMI..."

December 3 - Bloomberg (Tim Jones): "The Illinois General Assembly placed
new demands on the funding of municipal retirement plans, even as it recessed
until early January without acting on a $3.7 billion bond proposal to make
payments into state employee pension funds."

Kicking the Can

Limited time to write, again (I just don't know what I do with my free time...).

So, are policymakers making things better - or is policymaking simply kicking
the can down the road? While not adequately scrutinized, I am of the view that
the Fed's 2007 easing signals (beginning with the August 17, 2007 discount
rate cut following an unscheduled meeting) directly contributed to the severity
of the 2008 global financial crisis.

Recall that the CRB Commodities Index traded from about 300 in September 2007
to a record high of 474 by July 2008. Crude oil prices almost doubled to trade
to 147, a destabilizing price shock for an increasingly susceptible U.S. economy.
Global liquidity overabundance had the emerging markets on a rip. And in the
face of a mounting crisis, U.S. stocks were on a mini-roar. The S&P500
rallied to a record high in October 2007. Liquidity-driven market excess -
across the spectrum of asset classes all across the globe - had created unparalleled
systemic vulnerability. In the end, the global financial system came to be
hinged tenuously on one gigantic "risk on" liquidity trade.

Sometimes it does seem like déjà vu all over again. I have
addressed the discomforting parallels between the eruption of subprime problems
in the spring of 2007 (the first crack in the mortgage/Wall Street finance
Bubble) and this past spring's Greek crisis (the initial crack in the global
government finance Bubble).

It is worth noting that an aggressive loosening of monetary policy in 2007
- and into 2008 - had no positive effect on the underlying quality of U.S.
mortgage Credit, although it likely prolonged the mortgage issuance boom (total
mortgage Credit expanded almost $1.1 TN during 2007!). Irreparable damage had
been done during the Bubble. Aggressive "activist" policymaking could only
prolong market distortions and speculative excess.

The reemergence of financial stress with the Greek crisis incited an aggressive
response from the ECB (liquidity support), the Fed (QE2), and global central
bankers more generally (reluctance to move away from overly-stimulative policies).
Clearly, liquidity operations, the Greek bailout, and ultra-loose financial
conditions did not improve the Credit quality of Ireland's debt (or that of
Portugal, Spain, etc.). Yet, succumbing to market demands, the ECB yesterday
(again) postponed the initiation of its "exit strategy" to at least April 2011.
The markets triumphed yet again in a skirmish with policymakers - and celebrated
with a big, emboldened rally.

This summer's introduction of QE2 (and the death of "exit strategy") fostered
a dramatic loosening of financing conditions. Treasury yields collapsed. Mortgage
and municipal borrowing costs sank to record lows. Meanwhile, corporate Credit
spreads dropped to levels not seen since before the 2008 crisis. Corporate
issuance boomed, with record junk sales. The S&P500 has rallied about 21%
off of this summer's lows and the S&P400 Mid-Cap index has gained 27%.
Such a financial backdrop should be constructive for confidence, spending,
and economic recovery, and recent data has, unsurprisingly, been generally
upbeat. But today's non-farm payroll report provides a timely reality check.

Considering the unmatched degree of fiscal and monetary stimulus, U.S. economic
performance remains ominously dismal. Rising mortgage yields and a rising tide
of austerity throughout municipal finance portend challenges for an economy
already at 9.8% unemployed.

We're witnessing further evidence of the seductiveness of Bubbles. Massive
fiscal stimulus and ultra-loose monetary policy are supporting the most tepid
of recoveries. Meanwhile, inflating securities prices ensure investors and
analysts view the glass as at least half full. Policymaking works to inflate
stock prices, and then policymakers take comfort that buoyant markets are a
confirmation of the adeptness of their policies. Is it not apparent that the
big winner here is financial speculation?

The bubbling Chinese economy faces its own issues. Entrenched Bubbles scoff
at "tinkering" and timid policymaking - and China's Mighty Credit Bubble is
proving no exception. Today, China's Politburo released a statement saying
they "will adopt proactive fiscal policies and prudent monetary policy." The
country's officials are increasingly aware that aggressive tightening is warranted.
Home price inflation has proved resilient, while general consumer price inflation
has become well-entrenched. Food price spikes have emerged as a serious problem.

When I read of Chinese policy moves intended to suppress Credit and financial
flows going to speculative endeavors - while actively promoting lending to
more productive enterprises and to ensure ongoing economic expansion - I am
reminded of the failed course of U.S. monetary management in the latter years
of the "Roaring Twenties." It is the nature of Bubble economies that they become
Credit gluttons. Credit growth and financial flows grow increasingly unwieldy
- and the greater the inevitable imbalances the greater the overall Credit
expansion required to sustain the boom. Efforts to sustain boom-time prosperity
- while at the same time attempting to harness asset inflation and suppress
increasingly destabilizing speculation - are prone to spectacular failure.

Chinese authorities recognize they have a problem - a serious monetary dilemma
compounded and complicated by our QE2. Today's Politburo statement adds further
evidence that more aggressive tightening measures will commence in 2011. Yet
the markets have turned numb to such warnings, and I'll be the first to admit
skepticism that the Chinese will administer the necessary harsh medicine. Chinese
authorities have waited too long and allowed "terminal" Bubble excess to gain
a powerful foothold. With the Fed and ECB kicking the can down the road, the
markets can be forgiven for believing that Chinese policymakers will lack the
fortitude to truly tighten system Credit and liquidity.

Global markets could be at a bit of a crossroad here. Commodities are on
the move again, and mounting inflationary pressures - especially in China and
Asia - are a serious issue. And it wouldn't take much renewed dollar weakness
to push this issue to the forefront. The European peripheral debt crisis has
muddied the waters somewhat, but the upward bias on global yields was back
in play this week. The U.S. municipal bond market has stabilized. Yet the small
decline in yields following the big spike higher would seem to suggest further
vulnerability. A huge list of municipal issuers is lined up to sell debt.

The gamey U.S. stock market has placed a big wager on the "risk on" trade.
With QE2 in the early phase, greed has thus far held fear at bay. It surely
won't take months of disappointing data to spark QE3 banter. And there's nothing
like a world of synchronized speculative asset markets to embolden those banking
on global policymaker liquidity backstops - the Fed, the ECB, BOJ, PBOC...
Perhaps U.S. equities will begin to decouple from global asset inflation when
the fragile U.S. economy and Credit system come to be viewed as relatively
more vulnerable to surging commodities prices and rising global yields.

An important facet of my thesis holds that - with the post-Greek crisis global
focus on structural debt issues - the U.S. is in the process of becoming a
major focal point. In the grand scheme of things, Ireland may be only loud
noise. Gold, silver and commodities prices don't seem to be signaling sustainable
dollar strength or overall confidence in the way things are heading.

It took months for mortgage Credit contagion to spread from subprime to attack
the heart of the U.S. Credit system. Perhaps it's a stretch to analyze in terms
of an unfolding bursting of a global government finance Bubble - as opposed
to a European peripheral debt crisis. I just don't think so. And I fully expect
that after market ebbs and flows - and near panics that incite more speculator-emboldening
central bank market interventions/liquidity injections - the markets will inevitably
discipline Washington. In the meantime, we are left with a game of counting
the number of global policymakers kicking the can down the road.